How to understand long build up, short build up, short covering, long unwinding
Hello friends and welcoming to today’s new video. In today’s video we will provide an in-depth explanation for common jargons used by market participants. If you feel like some of these market terminologies make simple concepts harder to understand, make sure you watch this video till the very end!
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Many Futures Market Traders are often intrigued by these peculiar jargons used by market participants. These jargons are more specifically related to the concept of Open Interest (which by the way is a jargon in itself) & how it may impact the potential prices of an underlying (which can be Stocks, Indices or Commodities). The four common & at the same time important terminologies pertaining to futures market positions happen to be the following –
- Long build up
- Short build up
- Long unwinding
- Short covering
To understand these terminologies & their potential impact, we first need to understand the core concept on which these four positions are based on i.e. the concept of Open Interest.
Although Open Interest (popularly called as OI), can sometimes get very complicated to understand & we can have an independent article on it, in layman terms, it is nothing but the number of outstanding positions in the market at any given point in time. In other words, all the traders who have entered long (i.e. buy) positions, but have not squared off & all the traders who have entered short (i.e. sell) positions, but have not squared off are said to have “outstanding positions” in those contracts. These outstanding positions, when combined with price action give us some valuable information about the expected future price movement of the stocks. Let us try and understand it step by step –
- Long Build up – When the price of the underlying is going up & simultaneously Open Interest is going up, it tells us that, at every higher price level, big players are creating fresh long positions. Consequently, the expectation is that prices will continue to show upward price momentum, propelled by these increasing long positions.
- Short Build up – When the price of the underlying is going down & simultaneously Open Interest is going up, it tells us that, at every higher price level, big players are creating fresh short positions. Prices are expected to continue showing downward momentum, propelled by these increasing short positions.
- Long unwinding – Here the prices are going up, however at every higher level, big players are exiting their long positions or booking profits rather than adding more positions. This clearly tells us that the rally may be very close to maturing & the underlying may reverse soon.
- Short covering – In this last instance, the prices of the underlying are going down. However, at every lower price level, big players are covering their short positions. This implies that the falling prices may pause soon & show a reversal sooner or later.
These insights on positions build-up coupled with price action movements on charts, is a powerful tool for retail traders to set themselves up for the Trading day ahead. All they need to do is follow the foot steps of the big players or institutions & build their trading position in the direction of the existing open interest position in the markets. For example, one can shortlist all the stocks for the next day which have shown good addition in Open Interest with equally strong bullish price momentum on the price charts & plan possible long opportunities on them. And Vice-versa on short side. It goes without saying that additional knowledge of Technical Analysis tools & indicators come in handy for having a more precise Entry, Stop-loss & Target.
Where does one get this information pertaining to position build up?
This information is now easily available & accessible for free on major financial markets websites. Some of the most reliable resources are www.nseindia.com, www.moneycontrol.com, and www.indiainfoline.com, etc
Here we look at one recent example, where Cipla was seen adding huge Open interest, along with a sharp reduction in price.
This example is a great demonstration of how the Open interest actions are confirmed by the price charts. While Cipla kept adding OI, its price charts simultaneously gave a confirmation by slipping below the 20 Exponential Moving Average (EMA), & sloping down with strong bearish red candles. This essentially showed us that the addition of Open Interest is primarily happening on the short side. An astute Trader, will take this as a clear indication of shorts being added in the stock by big players, & follow their footsteps.
To summarize, Futures Open Interest data is an extremely effective indicator of Smart Money’s intention & keeping a close track of it in the interest of every retail trader.
Thank you for now. We hope you enjoyed this short video on significance of Open interest & promise to come back soon with more such valuable insights in the future.
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